Tax Type
Retail Sales and Use Tax
Description
Staircase manufacturer; Withdrawal from inventory for out-of-state installation; Dust removal system
Topic
Property Subject to Tax
Date Issued
05-09-1994
May 9, 1994
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear***********
This will respond to your letter of August 25, 1993, and various other correspondence between you or your client and the department, seeking correction of sales and use tax assessments issued to your client,*********(the "Taxpayer") for the periods January 1988 through November 1990 and December 1990 through November 1992.
FACTS
The Taxpayer, a manufacturer of spiral staircases, sells the staircases to various customers. On occasion, it may assist with the installation of or totally install the staircases. It was recently audited and found to have failed to remit use tax on the fabricated cost price of a staircase provided in connection with a real property construction project for an out-of-state customer. You contest the tax assessed on the fabricated cost price of the staircases. Furthermore, you contest the tax assessed on a dust removal system used in the Taxpayer's plant site as you maintain that the system is directly utilized and essential to the Taxpayer's manufacturing process.
DETERMINATION
Virginia Regulation (VR) 630-10-27 sets forth the department's policy with respect to persons who operate in a dual capacity of fabricating tangible personal property for sale or resale and for their own use and consumption in the performance of real property construction contracts. It provides that any person who is principally fabricating tangible personal property for sale or resale should:
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- collect and remit the tax based upon the total amount for which tangible personal property and services are sold, except that charges for labor and services rendered in installing, applying, remodeling or repairing property sold may be excluded from the tax when separately stated or charged.
It also provides that any person who is principally fabricating tangible personal property for sale or resale and who "withdraws tangible personal property from inventory for use and consumption in the performance of real property construction contracts is liable for the tax based on the fabricated cost price of the tangible personal property withdrawn."
The regulation provides further that raw materials and other tangible personal property to be fabricated for sale may be purchased exempt from the tax under a resale exemption certificate. However, raw materials which make up fabricated tangible personal property which becomes incorporated into real property are taxable on the cost price of such materials.
Further review of the facts surrounding the Taxpayer's operations reveals that the Taxpayer is principally fabricating the staircases for resale, and on occasion may fabricate a staircase for use in real property construction contracts. When he fabricates a staircase for real property construction contracts, he does not withdraw an entire staircase from his inventory but rather withdraws raw materials as the staircases are made to a customer's specifications. In both audit assessments, the Taxpayer was incorrectly held taxable on the fabricated cost price of staircases withdrawn from his inventory, rather than on the cost price of raw materials, for use in real property construction contracts.
As the facts were unclear as to the Taxpayer's operations, the department originally upheld the first audit assessment in P.D. 92-229 (11/9/92). However, in light of the clarification of the facts, I find basis for revising both assessments to remove the tax assessed on the fabricated cost price of staircases withdrawn from inventory and instead holding taxable the cost price of the raw materials withdrawn from inventory and used in the fabrication of such staircases.
In the future, the Taxpayer should accrue and remit use tax to the department on raw materials withdrawn from inventory and used in the fabrication of staircases in connection with real property construction contracts. He should collect and remit to the department sales tax on retail sales of staircases.
With respect to the dust system, I find that the tax was appropriately assessed. The system is not used in a clean room or protected area to enhance or assure the qualify of the product but instead is used in the Taxpayer's general plant area to remove sawdust. The department traditionally has held that such systems are not used directly in the manufacturing process and thus are taxable. (See P.D. 90-54 (4/12/90), copy enclosed.)
Accordingly, both the Taxpayer's current assessment and the prior assessment (for the period January 1988 through November 1990) will be revised as provided herein and a refund, including applicable interest, will be issued to the Taxpayer as soon as practicable.
If you have any questions about this matter, please let me know.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
c:
Office of Attorney General
OTP/6816H
Rulings of the Tax Commissioner